Semiconductor equipment vendor Applied Materials, Inc. (AMAT) will report its fiscal 2024 second-quarter earnings today after the bell. In this piece, we will determine whether Applied Materials is a buy or sell going into earnings.

For the second quarter, analysts predict a slight 1.4% year-on-year dip in AMAT’s revenue to $6.54 billion, in contrast with a 6.2% increase it recorded in the same quarter last year. Its adjusted earnings per share is forecasted to sit at $1.99, down 0.7% year-over-year. Nevertheless, the company has an impressive history, having beaten the consensus EPS and revenue estimates in three of the trailing four quarters.

Applied Materials exceeded analysts’ revenue expectations by 3.4% last quarter, reporting revenues of $6.71 billion, remaining steady year-over-year. This marked a robust period for the company, characterized by an impressive 11.8% beat of analysts’ EPS estimates and the issuance of strong sales guidance. With this performance in mind, there is a likelihood of another potential beat in today’s announcement.

In its previous earnings release, the company stated that it anticipates net revenue of approximately $6.50 billion this quarter, with a potential variance of plus or minus $400 million. Non-GAAP diluted EPS is forecasted to fall within the range of $1.79 to $2.15.

In terms of developments, on February 26, 2024, AMAT unveiled a new suite of products tailored for the latest chip manufacturing challenges, including issues like line edge roughness and edge placement errors encountered in chips at 2nm and below. The company’s Sculpta pattern-shaping technology is gaining traction among leading-edge logic chipmakers, offering a versatile toolkit for various applications.

By introducing groundbreaking etch systems, CVD patterning films, and metrology solutions, AMAT aims to complement and enhance the manufacturing of chips utilizing EUV and High-NA EUV lithography, ensuring continued progress and innovation in semiconductor technology.

On March 11, 2024, the company increased its quarterly dividend by 25% from $0.32 to $0.40 per share, underscoring its ability to generate profitable growth and strong free cash flow. The dividend is payable to its shareholders on June 13.

Further, this hike marks the seventh consecutive year Applied has raised its dividend. With a strong payout history, the company’s dividend has grown at 13.3% CAGR over the past three years, making AMAT’s dividend policy attractive for investors seeking income.

Shares of AMAT have gained 55.3% over the past nine months and 79.6% over the past year to close the last trading session at $217.49.

Here’s what could influence AMAT’s performance in the upcoming months:

Solid Financials

AMAT’s total revenue for the fiscal first quarter (ended January 28, 2024) remained flat year-over-year to $6.71 billion. Its gross profit increased marginally from the year-ago value to $3.20 billion, with the non-GAAP margin up 1.1 points year-over-year.

During the same period, its income from operations amounted to $1.97 billion, while its non-GAAP net income surged 17.6% from the prior-year quarter to $2.02 billion. On a non-GAAP basis, its earnings per share grew 4.9% from the year-ago value to $2.13.  Moreover, the company generated $2.33 billion in cash from operations, up 2.4% year-over-year.

As of January 28, 2024, its cash and cash equivalents stood at $6.85 billion, up 11.8% compared to $6.13 billion on October 29, 2023. Additionally, the company reported a non-GAAP free cash flow of $2.09 billion for the first quarter, representing a 5.7% year-over-year increase.

Favorable Analyst Expectations

Analysts expect AMAT’s revenue to increase 2.5% year-over-year to $6.58 billion for the third quarter ending July 2024. The consensus earnings per share estimate of $1.97 for the ongoing quarter indicates a 3.5% improvement from the previous year’s quarter.

In addition, for the fiscal year ending October 2024, AMAT’s revenue and EPS are expected to increase 0.8% and 2.3% year-over-year to $26.72 billion and $8.24, respectively.

Looking ahead, analysts anticipate an 11.2% increase in revenue for the fiscal year 2025, reaching $29.71 billion. Similarly, EPS for the next year is expected to experience a growth of 16.4% from the prior year, settling at $9.59.

Impressive Historical Growth

Over the past three years, AMAT’s revenue has grown at a CAGR of 13.3%. Its EBITDA and net income have increased at CAGRs of 15.7% and 22.9%, respectively, over the same timeframe. In addition, the company’s total assets have grown at a CAGR of 10.6% over the same period, and its levered free cash flow has improved at a 23.8% CAGR.

High Profitability

AMAT’s 30.72% trailing-12-month EBITDA margin is 212.9% higher than the 9.82% industry average. Similarly, the stock’s 20.34% trailing-12-month levered FCF margin is 102.5% higher than the 10.05% industry average.

In addition, its trailing-12-month net income margin of 27.03% is favorably higher than the 2.48% industry average. Furthermore, the stock’s ROCE and ROTA of 46.41% and 22.69% compare to the industry averages of 3.20% and 1.41%, respectively.

POWR Ratings Show Promise

AMAT’s bright prospects are reflected in its POWR Ratings. It has an overall B rating, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMAT’s A grade for Momentum is justified by its share price trading above its 50-day moving average of $204.59 and 200-day moving average of $166.89.

The stock’s B grade for Sentiment and Quality is in sync with its optimistic analyst estimates and robust profitability.

AMAT is ranked #9 out of 91 stocks in the Semiconductor & Wireless Chip industry. Click here to access AMAT’s Growth, Value, and Stability ratings.

Bottom Line

It’s no secret that generative AI is poised to revolutionize corporate operations. While NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (AMD) soar to new heights, we’re eyeing a less prominent yet profitable semiconductor stock capitalizing on the AI surge.

Revenue in the semiconductors market is projected to reach $736.40 billion by 2027, growing at a CAGR of 6.3%. Moreover, the AI chips market is forecasted to surge by 30% this year and surpass $150 billion by 2030, signaling substantial opportunities for semiconductor companies positioned in this space.

Despite an anticipated decline in earnings and revenue for AMAT in the upcoming report, the company’s long-term prospects remain promising. Additionally, the semiconductor stock exhibits high profitability, solid growth, strong financials, and offers an attractive dividend, making it a compelling investment option. Considering these factors, scooping up the shares of this B-rated stock could be a wise choice now.

How Does Applied Materials, Inc. (AMAT) Stack Up Against Its Peers?

While AMAT has an overall grade of B, equating to a Buy rating, you may also check out these other A (Strong Buy) or B (Buy)-rated stocks within the Semiconductor & Wireless Chip industry: Cirrus Logic, Inc. (CRUS), QUALCOMM Incorporated (QCOM), and ChipMOS TECHNOLOGIES INC. (IMOS). To explore more Semiconductor & Wireless Chip stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

AMAT shares rose $0.31 (+0.14%) in premarket trading Thursday. Year-to-date, AMAT has gained 34.74%, versus a 11.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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